If paying off your mortgage is dumb, why do so many rich people do it?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Not paying off a mortgage is financially the right decision. However, the emotional aspect to finances is real and for some folks putting the mortgage in the rear view mirror brings a lot of relief. No judgement here.

In hot real estate markets, the only way to buy a house is to have a cash offer. And if you don't get the mortgage when you buy, you cannot just go get a mortgage on a home later.

I know plenty of people who have done that.

you have 90 days after close to get a mortgage and have it qualify as a mortgage for acquisition.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Can we stop this false narrative now. Most wealthy people do not have mortgages. Full stop. Some do and the reasons why are on this thread. But most do not. Most use money from outsized market gains like before last year’s meltdown and pay off any debt. Why? The really wealthy 25 million plus do not want to deal with debt and are uninterested in the arbitrage. The wealthy 10- 25 million know how quickly the world turns on you and that debt should disappear in good times. Below 10 you are doing great but you are not wealthy.

You have to stop this false narrative that wealthy people do not take mortgages. Maybe that's true for the small UMC DCUM rich. But the true wealthy people do take mortgages.
I used to work in real estate in New York and I can tell you that 90% of people buying expensive properties had a mortgage. No rich person in their right mind would buy a $10M property and pay cash when they know they can borrow that money at 3% and instead invest the cash in a hedge fund for a much higher return.

Explain to me why Zuckerberg, Buffett, Elon, etc... take mortgages. Do you think they are stupid?
https://www.fool.com/the-ascent/mortgages/articles/why-did-mark-zuckerberg-get-a-mortgage-on-his-home/

I don't think they are stupid. The person I think is stupid is anyone who uses Zuckerberg, Elon, Buffett or anyone else at that level as a data pint to make a comparison to what anyone else should do - whether they are MC, UMC, or regular old rich. There are entirely different considerations in play, and that fact that you can't see that means your judgment is so suspect that I'm not taking *anything* you say seriously.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:You always see it on the real estate forum: “Oh, that’s a $4 million house so interest rates don’t matter. At that price point, people are just paying cash.” Don’t those rich, smart people know that they can just take out a mortgage for 6% and invest the difference in the stock market at 10%? And then when interest rates drop, they can refinance to a lower mortgage rate.

I finally have enough saved up to pay off my mortgage, and it’s the greatest feeling in the world. I am actually violating my own rule a little bit – right now, I have the money in I Bonds and short-term Treasuries, but only because they’re risk free and paying a higher rate than my 4% mortgage. But the minute the interest rate drops below my mortgage rate, I’m cashing out and paying off my mortgage. It’s such a huge stress relief to have arrived at this point.

My only meaningful expenses going forward are going to be food, utilities, and property taxes, along with the occasional home repair. It feels incredible because I now require very little income to survive. And I assume super rich people also feel that way since many of them don’t use mortgages. To me, part of being rich (even though I’m not “rich” yet) is not having to make every decision purely based on maximizing money.

For example, you could say that some rich people are dumb because they take significant amounts of leisure time – don’t they know they could be working and earning more money? But at a certain point, it’s not all about the money - it’s about your lifestyle and how you feel getting from Point A to Point B. Thoughts?

The rich have other ways to get liquidity. I don't, so I don't park my liquidity in home equity.

This is an important point that is overlooked often. We, and suspect many people here, are "rich" by any rational definition., But we aren't "rich" in that I can come up with the outstanding balance on our mortgage (~$700k) at the drop of a hat without adverse consequences. Sure, we have it, but we'd get smoked in taxes, and potentially other penalties. That's just a longer way of saying what the PP said - if I paid off my mortgage, I wouldn't have easy access to liquidity.

So for the really, rich, it's a non-issue - they have enough money so that any difference between paying off the mortgage or investing is a rounding error, and they have no concerns about immediate liquidity. We have a NW of about $5m, but most it's tied up in tax advantaged accounts, or would require a big tax hit if we needed it ASAP. So the money we keep in CDs, HYSAs or Treasuries that could be used to pay off the mortgage - which is earning more interest than we pay in mortgage interest - is marginally more lucrative, and provides more flexibility than if we'd paid off the mortgage, without sacrificing any "safety."

Begrudging, this is what I’m doing.

15 years ago my finances were a mess. Way too much debt, way too little income. I promised myself I’d one day be debt free.

Well, fast forward and here I am. Married, HHI $400,000+, no debt…except the house. I always thought I’d pay it off ASAP, but I see the value in having the equivalent mortgage balance in CDs.

Since we have a 15 year mortgage, the delta is growing each month, increasing the comfort factor. Maybe someday I’ll pay it off, but not today.

[Anonymous]

We aren’t paying off our mortgage because we have a very low rate. Our non-retirement savings are in a combo of high yield savings accounts and low cost index funds. We are not doing anything fancy or aggressive, so we’re out earning our mortgage rate as-is. We don’t have the desire to invest our time and energy at this phase of life (young kids) to be more sophisticated investors. College saving is on track and we plan to retire in our mid-late 60s.

I see paying off a mortgage as a mental and emotional decision in addition to a financial one. I can see how, for many people, freeing up that monthly cash flow helps them feel more comfortable. We contribute to our retirement accounts, college savings, an employee stock purchase plan. If we fell on hard times, we can stop or reduce any of those payments to free up cash flow. I recognize that is a privileged position and many families don’t have a lot of optional monthly spending. In that scenario, freeing up the cash flow to the mortgage may not be the most financially advantageous choice in the long run. It is however an “insurance policy” to help them feel better about their ability to adjust to changing financial needs.

[Anonymous]

My view is you pay off your mortgage based on interest rate (can't do better in any market in the foreseeable future) and/or you have enough other cash, liquid investments and longer term investments to last you until you downsize when older.

I don't yet feel comfortable enough that I will never need the cash that I would sink into the house. And getting cash back out of a house without selling it is not as easy as some people make it out to be.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

That doesn't answer the question of why the family pays cash instead of investing.

Maybe because they’re dumb with money?

Obviously because they are paying themselves, with family money they will inherit in the future, instead of just handing it over to a bank. Hardly dumb.

[Anonymous]

I retired more than a decade earlier than the average American in my early 50s and haven’t done a lick of work since. The ONLY reason I was able to pull this off financially is by not paying off my low interest mortgages prematurely and investing in the market. Nothing crazy - just index funds. I would have been so much worse off had I taken the opposite approach. It is such an unsophisticated financial move to pay a mortgage off early.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

That doesn't answer the question of why the family pays cash instead of investing.

Maybe because they’re dumb with money?

Obviously because they are paying themselves, with family money they will inherit in the future, instead of just handing it over to a bank. Hardly dumb.

Why are they even paying it back to their own family?

[Anonymous]

This is an important point that is overlooked often. We, and suspect many people here, are "rich" by any rational definition., But we aren't "rich" in that I can come up with the outstanding balance on our mortgage (~$700k) at the drop of a hat without adverse consequences. Sure, we have it, but we'd get smoked in taxes, and potentially other penalties. That's just a longer way of saying what the PP said - if I paid off my mortgage, I wouldn't have easy access to liquidity.

I feel the same as above. In addition payoff math is not that trivial and simulations show that both approaches are valid.

https://www.honestmath.com/mortgage-math

The math behind this classic tradeoff is much trickier than it seems

For U.S. equity investors over the prior 30 years, there was little to no difference between paying off your mortgage over a 15- or 30-year time period

Any cost or benefit for this tradeoff was just as likely to come from tax benefits as it was from investment arbitrage economics

Stock market volatility, leverage, and timing (luck) are essential to the economics

The decision on whether or not to prepay a mortgage might be better served by factors other than perceived arbitrage opportunities (e.g., risk aversion, personality, personal goals, unusual tax implications)

[Anonymous]

Anonymous wrote:We paid off ours and its was freeing. Now we can save that money.

This.

Money is behavioral. If it were all simple math, no one in this country would have credit card debt, either.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Nobody so far in this thread has mentioned how the truly wealthy families with generational money do it. The younger generation wanting to buy the house uses family loans to buy the properties outright in cash and then they pay the loans back to the family at extremely low low interest rates (because there is a legal requirement) and then any outstanding debt is forgiven at a later time (usually when the original older granter passes away). So the loan money stays within the family, as does the house. The bank is never involved.

That doesn't answer the question of why the family pays cash instead of investing.

Maybe because they’re dumb with money?

Obviously because they are paying themselves, with family money they will inherit in the future, instead of just handing it over to a bank. Hardly dumb.

Why are they even paying it back to their own family?

Maybe to show the older family members they are responsible, productive members of society?

[Anonymous]

Anonymous wrote:Not paying off a mortgage is financially the right decision. However, the emotional aspect to finances is real and for some folks putting the mortgage in the rear view mirror brings a lot of relief. No judgement here.

I agree. I have two homes with no mortgages and when rates were at 3% or under I thought about it because I was confident I could get 8% in equities long term. But I just retired and I had no interest in making mortgage payments or going through the whole process. On paper it would have been the smart decision but I wanted to simplify my life.

[Anonymous]

I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

[Anonymous]

Anonymous wrote:I've never understood why it is considered "dumb" to pay off a mortgage. Not everyone is good at investments or following the stock market. If you have a mountain of cash doing nothing in a bank account then pay your mortgage off.

If you're that financially simple-minded, maybe so. I suppose mortgages are something even they can understand.

[Anonymous]

Anonymous wrote:

Anonymous wrote:We have $6.5 milllion liquid invested and a $1 million interest only at 2.8% on a $2.5M house (we bought 10 years for $1.5M) so we never pay down principal. We worked out a retirement goal of $300k annual after tax passive income. To get there our wealth advisor uses rule of $300k x 30 = $9M liquid needed with 30/70 bond/stock. To get from $6.5 to $9 liquid faster we want compounding liquid returns which you don't get if you convert liquid capital to non-liquid capital in your house. $1,000 in the market will earn more compounding than if it was converted into your hardwood flooring. Plus you still live in your same house and its capital appreciation still is yours not the bank's. It makes sense to keep a low interest, interest only mortgage forever and never pay down principal. We basically have somebody else's $1M locked into our home at a 2.8% cost while we own the home apppreciation, mortgage interest tax benefit, compounding return on our mirror $1M liquid we keep compounding the market, maximize our monthly cash flow, and still wake up in the same house every day.

I wish somebody would do this math for me. I need 150K to live on after taxes so if it's half, I'd need 5? I'm on target for that in 5 years. Did I get that right?

Yes, each chunk of what you want, after tax free cash flow annually, is called a “unit”. To live perpetually without touching the capital and eating into it, you need 30 units. So in your target it’s $150k x 30 = $4.5 million. You want 10 units in a bond ladder in $150k chunks and 20 units in a stock blend ideally. Each year you use one of your bond ladder units as income and replace it with capital gains on your stock portfolio on the good years when it’s up. You always have 10 years of low risk steady cash flow in the future so you don’t need to stress over the ups and downs year to year of stocks. Overall, you’ll be able to replace units in your bond ladder and perpetually maintain your cash flow in retirement. You can make slight increases for inflation each year accordingly.